Child Tax Credit for 2021

Effective for tax year 2021 only, the American Rescue Act of 2021 has expanded the Child Tax Credit (“Credit”).   

The Credit has been increased to $3,000 per qualifying child who is under age 18 at the end of 2021 and to $3,600 per qualifying child younger than age six at the end of 2021. This reflects an increased Credit amount of $1,000 and $1,600 over the previous year’s Credit of $2,000. In addition, for tax year 2021, the full amount of the Credit is refundable.

The phaseout of the entire Credit is a two-layered process.

1. For the increased Credit portion, the phaseout will be $50 for each $1,000 (or a fraction thereof) that the taxpayer’s modified adjusted gross income exceeds $150,000 married filing jointly, $112,500 head of household, or $75,000 for those filing single or married filing a separate return.
2. Once the increased Credit is phased out, the $2,000 portion (which applies to a qualifying child who is under the age of 17 at the end of 2021) is phased out by $50 for each $1,000 (or a fraction thereof) that the taxpayer’s modified adjusted gross income exceeds $400,000 married filing jointly or $200,000 for all other filing categories.

Some taxpayers received advance payments in 2021 based on estimates the IRS used from the taxpayer’s prior years’ tax returns. The total Credit calculated on Form 8812 of the 2021 returns will need to be reduced by the advance payments received. If the advance payments exceed the total Credit allowed, the excess will be added to the taxpayer’s tax liability for 2021. The IRS will be issuing Letter 6419 to all taxpayers getting advance payments showing the amount received in 2021.

A special credit of $500 is allowable for each dependent who does not qualify for the Credit of $2,000 (number two above). This includes children over age 17; children without Social Security numbers; or qualified dependents who are not children, such as parents or siblings. The special credit is nonrefundable. The adjusted gross income phase-out rule is the same as mentioned in number two above.